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Stock Market Today / Stocks
Three Dividend-Paying Stocks Likely to Increase Payout
One reason investors are scared silly over fiscal cliff 2013 is the potential tax hike that will affect investing in dividend-paying stocks.
If Congress doesn't act the rate on dividends will revert to the ordinary income rate, which tops out at 39.6%, after it was lowered to 15% during the George W. Bush administration.
"It's a foregone conclusion the rates are going up -- it's just a matter of how high they go," Todd Lowenstein, a money manager with HighMark Capital Management Inc. told Bloomberg News.
But history shows dumping dividend-paying stocks because of higher tax rates is a losing game.
Even if tax rates go up, investors will fatten their wallets on companies that raise dividends because the money compounds over time, essentially paying interest on the interest.
And right now, there are plenty of good reasons for corporations to reward investors with higher payouts.
Why Dividend-Paying Stocks Will Increase Payout
Companies are sitting on $3 trillion of cash and can create badly needed goodwill by showing they're attuned to investor concerns about higher taxes, according to HighMark's Lowenstein.
Plus, if corporate tax rates climb, companies may want to increase their dividend payouts instead of paying more taxes on interest from that cash.
And it's about time, based on the miserly way companies have been treating investors.
Companies in the S&P 500 paid a paltry 27% of earnings to investors in dividends last year, according to research from Goldman Sachs Group Inc(NYSE: GS). Over the past 50 years, the payout ratio has rarely dropped below 40%.
In fact, the best companies are committed to boosting their dividends in even the worst economic times. Many of them are so predictable that you can narrow it down to the very day they'll pay dividends and, in some cases, even the size of the increase.
Three Dividend-Paying Stocks Likely to Pay More
Here are three companies with long track records that will almost certainly raise their dividends in the near future:
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How to Find the Best Dividend-Paying Stocks for You
- By Tim Melvin, Contributing Writer
If you find yourself always on the hunt for the best dividend-paying stocks for your portfolio, that's because one of the most discussed topics in the past two years has been the search for the right income investments.
We all know the story and the problem.
The U.S. Federal Reserve has lowered interest rates to basically zero and has made it clear it intends to keep them there for years. The hope is that this eventually spurs the economy and returns us to a state of economic growth.
While we don't know how the Fed's efforts will succeed given two more years, we do know that it has created near impossible conditions for investors in search of income.
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Investing in Emerging Markets: 2013 is Year of the Dividend
- Money Morning staff reports
In August 2012, a record $34 billion in dividends was paid to investors, topping the previous record of $32.1 billion set in November 2011.
September was not too shabby either in terms of dividends and payout increases. At this point it is fair to say 2012 will prove to be a very favorable year for income investors.
Indeed, U.S. companies are parting with their cash in the name of rewarding shareholders. That includes the usual suspects among dividend champions such as The Coca-Cola Co. (NYSE: KO), The Procter & Gamble Co. (NYSE: PG) and other blue chips.
However, with 2013 knocking on the door, now might be the time for investors to make an early New Year's resolution to expand their dividend stocks exposure.
That's because emerging markets equities are climbing the dividend ladder as we speak.
Research from UBS indicates the 300 largest non-financial firms in the MSCI Emerging Markets Index are expected to pay $52.2 billion in dividends this year, up from $48.9 billion, according to The Financial Times.
Translation: The time has come to consider investing in emerging market dividend stocks.
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The Best Dividend-Paying Stocks to Buy Now
Some investors fail to realize that successful investing is a matter of continuous performance, not instantaneous performance.
That's why we like dividend-paying stocks.
Over time, dividends and reinvestment can account for 85%-90% of total stock market returns.
In some cases, the dividends are so steady and increase so much that you actually make more in dividends than you paid to buy the stocks that produce them.
And as inflation concerns grow following QE3, investors need to make sure they are protected.
Money Morning's Global Investing Strategist Martin Hutchinson says dividend-paying stocks offer that protection.
"Do you know what the ultimate investment protection is? It's not gold, and it's certainly not Treasuries. It's dividend stocks," said Hutchinson.
But before you go hunting for the best dividend-paying stocks, let's set some ground rules for evaluating which ones are most valuable.
First, a good cutoff is a stock with a yield close to 3%, preferably higher, and a payout ratio less than 60%. Any higher payout ratio would indicate that the company cannot sustain the dividends, manage debt and grow at the same time.
Second, look for companies that have price/earnings ratios less than 25 and a solid history of paying and increasing dividends.
This establishes a solid benchmark for dividend stocks and their fundamentals. Sometimes a dividend stock can look great because it has a 10% yield, but you have to look at the other numbers to decide if it's a worthy investment.
To avoid those high-yield traps, check out this list of some of the best dividend-paying stocks to buy right now.
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Investing in Dividend ETFs: Want Super Yield? Try These
- Money Morning staff reports
With the U.S. Federal Reserve intent on keeping interest rates low until at least late 2014, investing in dividend ETFs (exchange-traded funds) is necessary for income investors who are all but forced to consider asset classes beyond money market accounts and U.S. Treasuries.
The interest rates on products are now so piddly that investors are all but preconditioned to view either equities or high-yield bonds as the most viable options for generating income.
By virtue of the anemic yields on CDs and Treasuries many investors are left thinking the yields on usual suspect blue chip dividend stocks are great. The 3.3% yield offered by consumer staples giant The Procter & Gamble Co. (NYSE: PG) is viewed as "good." These days, BP Plc (NYSE: BP) with its 4.6% dividend yield is considered "stellar."
They're just two examples, but BP and P&G prove the point that in today's market "decent" yields are viewed as "great." That is one reality of today's low interest rate environment.
Another reality is that the low yield story has been overdone. To borrow from baseball terminology, the low yield story is in the ninth inning.
On the other hand, the still unheralded super dividend theme is still in its infancy. The good news is investors can easily tap into the super dividend story with the following ETFs.
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Why Dividend Investors Should Worry About an Obama Victory
I don't have to tell you there is a lot at stake for dividend investors in November.
In fact, an Obama victory could hit income investors with something of a double whammy.
You see, for dividend investors it isn't simply just a matter of higher tax rates, the changes President Obama has in mind may result in fewer dividends paid altogether.
You can chalk it up to the law of unintended consequences.
Let me explain.
Thanks to the Bush tax cuts of 2003, dividends are currently taxed at 15% to individual investors.
The rationale for the change was that dividends are paid from income that has already been taxed once at the corporate level. It means the total top federal tax rate on dividends, including the 35% corporate tax, is currently 45% (the net received is 85% of 65%).
Even with the tax break, that's still higher than the top 35% rate of personal income tax.
That's bad enough, but even if the Bush tax cuts are renewed before the "fiscal cliff" strikes at the end the year, investment income will suffer an additional 3.8% tax starting on January 1 to pay for Obamacare.
That means the total tax on dividends could jump to a whopping 47.2%.
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Don't Let Fiscal Cliff 2013 Scare You from Dividend Stocks
Amid all the talks of fiscal cliff 2013, which we'll hit Jan. 1 if Congress doesn't act, some analysts are warning of the impact on dividend stocks.
That's because some of the tax increases associated with the fiscal cliff could deliver a hefty tax hike to dividend income.
But the possibility of higher dividend taxes doesn't mean you should ignore the sector altogether.
History shows that dividend-paying stocks have outperformed non-dividend shares even at a time when taxes were much higher. For income-seeking investors, any pullback in dividend-paying stocks as the fiscal cliff approaches may just be a buying opportunity.
Investors early to the game will enjoy dividend payments and also benefit from these companies' healthy market performance.
Fiscal Cliff Effect on Dividends
If nothing is resolved before year-end and Congress fails to take action, dividends received will be taxed as ordinary income instead of the current maximum 15%. Ordinary income tax rates are scheduled to revert to pre-2003 levels, with a maximum of 39.6%.
In addition, a new 3.8% tax will be tacked on to help pay for the Affordable Care Act. For some taxpayers, dividend taxes would nearly triple.
But remember, before investors enjoyed the 2003 dividend tax breaks that put dividend taxes on par with capital gains taxes, payouts had been taxed for decades at ordinary income rates. For some, the tax was as much as 91% in the late 1950s and early 1960s, 70% in the 1970s and 50% in the early 1980s.
Despite those lofty tax rates, dividend stocks continued to maintain a prominent position in portfolios of income oriented investors, and these stocks continue to share their wealth with satisfied shareholders.
From the end of 1979 through July 2012, dividend-paying stocks in the Standard & Poor's 500 Index carried an annualized total return of 12.1%. That compares with a 10.7% return for nonpayers, according to data from research firm S&P Capital IQ.
MarketWatch did the math and calculated that an initial investment of $10,000 in the dividend bunch would have morphed to a whopping $408,000 over that time frame compared to $271,000 for the nonpaying group.
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Dividend-Paying Stocks: AOL Not the Only One to Raise Payout
AOL Inc. (NYSE: AOL) announced Monday it would divvy out $1.1 billion in cash to shareholders, joining the growing group of dividend-paying stocks - although only for brief moment.
AOL will dole out a one-time payment of $5.15 a share to holders of record Dec. 5, for a total of $500 million given out in dividends.
In addition to the whopping and unexpected dividend news, AOL also reported a $600 million fast-tracked share repurchase agreement with Barclays Plc (NYSE ADR: BCS).
The move comes on the heels of a deal inked in April to sell 800 patents to Microsoft Corp. (Nasdaq: MSFT). At the time, AOL assured its plans were "to return a significant portion of the sale proceeds to shareholders."
The move also follows a push from activist shareholder group Starboard Value LP, which had been lobbying for AOL to unload its patent cache and reward shareholders with a dividend and share repurchase program.
Investors applauded the dividend news, sending shares of AOL up more than 3% Monday. The stock has been on a tear, climbing more than 120% year-to-date.
While AOL has only planned a one-time dividend, many other companies in 2012 have announced regular payouts.
Dividend-Paying Stocks: Payouts on the Rise
A number of companies are beginning to recognize just how important dividends have become in this era of low-interest savings accounts and certificates of deposits (CDs) that offer paltry yields.
In fact, dividends, once a trademark of stodgy blue chip companies, are emerging in full force in the tech sector.
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Three Places to Find the Highest Dividend Paying Stocks
Income investors are on a never ending search for the highest dividend-paying stocks but most of them don't know where to look.
They either settle for dividends that are far too low and may never grow a penny...or they take on way too much risk.
But there's a simple solution if you're looking to boost your income stream.
Fact is, there are at least three sectors right now where investors can safely build a fortune in high paying dividend stocks.
Here's why.
The Highest Dividend-Paying Stocks that Outperform
History shows that investors who hold great dividend-paying stocks can outperform every other major sector-- including gold, silver, T-Bills, or bonds--by a wide margin.
From 1972 through 2007, dividend-paying stocks returned between 8.9% and 10.9% on average every year, according to a recent study by Ned Davis Research. Meanwhile, non-dividend paying stocks brought in a paltry 2.5% gains.
In other words, high dividend stocks provide 4.5 times greater wealth building power than non-dividend payers!
Here are three market sectors that are chock full of the highest dividend-paying stocks that offer growth potential and a measure of safety to boot.
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A Dividend Paying Stock for "Times Like This"
Earnings season teaches us a lot about companies - like which ones have figured out how to successfully navigate in the uncertain economic times we have now. And this earnings season has shown us that there's a dividend paying stock that has not only delivered profits but could increase its already healthy payout.
Money Morning's Shah Gilani joined Fox Business' "Varney & Co." Tuesday morning to talk about this top sin stock that can deliver consistent money to your portfolio.
"[This stock] has a 4.7% dividend yield. I think you have to like anything that provides you income and that has appreciation potential," said Gilani. "[This stock] is always on the top of my list."
This stock delivered blockbuster Q2 profits. Watch this accompanying video to hear everything Gilani has to say about this dividend paying stock that can give your portfolio some profit protection.
